Sale comes within months of DNS overseer pushing through controversial contract change
The sale of one of the internet’s most popular registries to a private equity firm has revived concerns over how the domain name system is governed.
At the end of last week, the Internet Society (ISOC) announced that it has sold the rights to the .org registry for an undisclosed sum to a private equity company called Ethos Capital.
The deal is set to complete in the first quarter of next year.
The decision shocked the internet industry, not least because the .org registry has always been operated on a non-profit basis and has actively marketed itself as such. The suffix “org” on an internet address – and there are over 10 million of them – has become synonymous with non-profit organizations.
However, overnight and without warning that situation changed when the registry was sold to a for-profit company.
The organization that operates the .org registry, PIR – which stands for Public Interest Registry – has confirmed it will discard the non-profit status it has held since 2003 as a result of the sale.
Adding to a sense of betrayal, the organization that decided on the sale – the Internet Society – has always been viewed as a supporter and protector of the engineer culture that devised and developed the networking technology that made the modern internet possible. That culture has always sought to provide a counterbalance to growing commercialism of the internet.
That decision to sell was made by the boards and management teams at both ISOC and PIR, according to a statement provided to The Register: “In terms of decision-making, the Boards – and executive management teams – of both the Internet Society and PIR were closely involved and voted to proceed.”
But that’s only part of the controversy: there is also the matter of who the registry was sold to.
Despite ISOC calling the purchaser Ethos Capital “a strong strategic partner that understands the intricacies of the domain industry,” no one in the internet industry had ever heard of the company when the sale was announced. Which wasn’t a surprise since it was established a few months earlier.
Who’s behind Ethos?
Despite stating that Ethos Capital “understands the intricacies of the domain industry” its founder and CEO Erik Brooks has no experience within that industry. The firm’s website lists only Brooks and one Nora Abusitta-Ouri – who joined the outfit last month as its “chief purpose officer” – as employees.
But there is a common thread between those two and it is Fadi Chehade, a former CEO of ICANN, the organization that oversees the domain-name system and awards the contracts to run internet registries.
It was under Chehade that ICANN radically changed its approach to internet registries, including a massive expansion of the internet namespace and a move toward a free market approach to internet addresses. Chehade’s actions as CEO led directly to the Ethos Capital buyout of .org but he is not listed as a part of Ethos Capital and the company has so far failed to respond to our questions about his connection to the firm.
More recent decisions by ICANN also had a significant bearing on the decision to sell the .org registry. At the end of June this year, in a controversial decision made despite significant and vocal opposition, ICANN decided to lift price caps on .org domains for the next 10 years, paving the way for unlimited price increases on the 10 million .org domain names. That decision massively increased the value of the .org registry from millions to potentially billions of dollars.
At the time, ICANN justified the decision by saying it was bringing the contract in line with the many new extensions that have been added to the internet in recent years. And this week, ICANN’s chairman Maarten Botterman told The Register in a statement that:
“The renewal agreement for .org removed the price cap and includes pricing provisions that are consistent with the base form registry agreement that is published and has been in public view for some time, essentially removing the role of ICANN in pricing restraints, where possible.”
Profitable conformity
But that logic has been repeatedly questioned by the internet community both at the time and since. Several high-profile non-profit organizations, including America’s National Public Radio (NPR), C-SPAN, the National Geographic Society and the YMCA, wrote a joint letter to ICANN complaining that the organization had “articulated no compelling policy basis for this proposed change.”
They rejected ICANN’s contract conformity argument, stating: “This strikes us as conformity for its own sake. ICANN should not disregard the public interest in favor of administrative convenience.”
The joint letter was just one of 3,200 comments sent to ICANN on the issue, which was itself an indication of the extraordinary interest in the proposal since ICANN rarely receives more than 50 comments for any of its comment periods.
ICANN’s subsequent official summary of the comment period – which the organization’s board is said to have used to make a determination – did not reflect that strength of feeling, however, and gave almost equal weight to those in favor of the proposal as those against.
Such apparent bias sparked a furious response from the internet community, with one member carrying out an independent analysis of the comments in which he concluded that no less than 98 per cent of comments sent in were explicitly opposed to the change.
In addition, those in favor of the change – whose arguments were repeated in the official summary – are linked to organizations that stand to benefit financially from the decision to lift price caps on all “legacy” registries. That analysis was published online under the title “The Case for Regulatory Capture at ICANN.”
Community support waivers
Even those that supported the proposal – including ICANN’s own At Large Advisory Committee (ALAC) and Non-Commercial Stakeholder Group (NCSG) – expressed concern about the risks associated with removing price caps. And both groups have reacted with disbelief and alarm at the decision by ISOC to sell the .org registry.
“I must say, this casts the decision to drop price caps for .org in a slightly different light,” the chair of the NCSG, Stephanie Perrin, responded in an email when the news first came to light. The chair of ALAC, Maureen Hilyard, felt the same: “I know for sure that this was not even hinted at during the last PIR Advisory Council meeting, but it will have major implications for the ISOC chapters. What are they/ISOC thinking?” she posted.
For its part, ISOC challenges the notion that there was widespread opposition to lifting the price caps. It told us: “When it comes to price caps, there was a group that opposed lifting price caps, but it is not true that ‘the community’ was ‘strongly opposed’ to lifting them.
“The ICANN agreement that now governs .org was in fact the result of a long and serious community consideration inside ICANN. The effort to get ICANN out of the business of trying to do things like regulate prices was also a community effort. The people who strongly opposed lifting the price caps certainly made their views known but that does not mean that the whole community was in fact opposed to getting ICANN out of the business of regulating prices.
“Moreover, the removal of price caps on .org earlier this year (and months before we were approached by Ethos Capital) weren’t unique or specific to .org. ICANN’s decision was consistent with how it treats other registry agreements.”
No one, including, we understand, the board of ICANN, expected the Internet Society to sell the registry. But it is also worth noting that the contract negotiation failed to add, or even ask for, protections or commitments to .org’s long-standing non-profit status despite the significant contractual changes and an extension of the contract by 10 years, far longer than previous extensions.
Opaque decision-making
Adding to the frustration is the fact that ICANN gave no explanation for moving ahead with the decision to lift caps despite the public opposition. It also carried out no economic analysis of the change, despite being aware that it could be worth billions of dollars. Unusually for such a high-profile issue, the decision was also made by the organization’s staff rather than its board.
Under accountability measures, an ICANN board decision would have required the organization to look at it through a variety of lenses that would have raised serious question marks over the decision. In particular, the board would have to consider and discuss: the materials it has reviewed; any concerns raised by the community; any fiscal impacts or ramifications on the community or public; how the action served the public interest; and provide a rationale for the decision.
But the board did not make the decision, despite its high-profile nature and previous precedents, and as a result there was no explanation or rationale given. Adding to the sense that the entire process was flawed, no announcement was made about the decision to lift the price caps, and the new contract was simply uploaded to the webpage associated with the .org registry on the same day it entered into force.
Given the unexpected nature of the sale, the level of secrecy surrounding it – people still do not know who Ethos Capital is, how much it paid, or where its funds come from – and the huge sums of money at stake, the internet community is keen to find out the details of how the deal came about in the first place.
The CEO of PIR, Jon Nevett – who had been in his position just a few months before the contract change – has said that PIR had no knowledge of the planned sale to Ethos Capital at the time. And ISOC has told us in a statement that: “The Internet Society was first approached by Ethos Capital in September.”
But a number of factors suggest that informal discussions and even arrangements may have happened long before between the individuals in charge. It is notable that in the statements so far, queries over discussions have only referred to the organizations themselves rather than the individuals representing them.
The Chehade shell game
Former ICANN CEO Fadi Chehade personally registered the domain name currently used by Ethos Capital in May and it was registered as a limited company in the US state of Delaware on May 14. That date is significant because it is one day after ICANN indicated it was planning to approve the lifting of price caps through its public comment summary.
As such it appears that the plan to purchase the .org registry was predicated on the price caps going ahead and that those behind the deal had intricate knowledge of ICANN’s internal processes.
Given the significant cultural hurdles that the sale of the .org registry would have to have overcome within ISOC and PIR, not just because it would cease to be a non-profit organization but also because ISOC is highly dependent on the registry’s revenue for its own financial well-being, it seems extraordinary that a deal of such magnitude could be agreed to and signed in just two months – as ISOC claims.
Some suspect that the deal has long been under informal discussion, with ISOC CEO Andrew Sullivan – who took over in September 2018 – working on it long before the contract negotiations. One potential indicator is the fact that ISOC restructured how it carries out one of its most significant duties – grant disbursements to internet society chapters across the globe – and set up a new Internet Society Foundation in February 2019.
That foundation is expected to be a central beneficiary of the deal that ISOC has struck with Ethos Capital, the details of which are still unclear. In its official announcement this month, ISOC said only that: “This transaction will provide the Internet Society with an endowment of sustainable funding and the resources to advance our mission on a broader scale as we continue our work to make the Internet more open, accessible and secure – for everyone.”
Others point to the long and ongoing relationship between PIR CEO Nevett and those behind Ethos Capital, thought to include not one but two former ICANN senior executives.
And another former ICANNer
Fadi Chehade is almost certainly closely connected to the deal, and so is his long-term business associate Akram Atallah. Atallah worked for Chehade at his former company before becoming COO of ICANN in 2010. When the at-the-time CEO of ICANN left in 2012, Atallah became interim CEO and recommended his friend Chehade for the chief executive role. Chehade became ICANN’s CEO from 2012 to 2016. When Chehade left, Atallah again took over CEO duties until a new CEO was chosen.
With weeks of leaving ICANN, Chehade joined private equity firm Abry Partners where the managing partner was Eric Brooks. Brooks left Abry Partners earlier this year after 20 years with the company to become the founder and CEO of Ethos Capital.
The only other named employee of Ethos Capital is Nora Abusitta-Ouri, a long-term associate of Chehade. Abusitta-Ouri was brought into ICANN by Chehade when he became CEO and left with him to work as his adviser at the World Economic Forum, then at Chehade’s “Chehadé & Company” consultancy, before becoming “chief purpose officer” at Ethos Capital earlier this month.
Connecting this group of four men – Chehade, Brooks, Atallah, and Nevett – further, Abry Partners invested heavily for the first time in the domain name industry in 2018 when it paid an undisclosed sum – thought to have been hundreds of millions of dollars – for internet registry operator Donuts, a company that was cofounded by Jon Nevett.
Nevett left the company one month later to become CEO of PIR and his previous position was taken immediately by Akram Atallah, who left ICANN unexpectedly and at short notice.
All this shuffling did not go unnoticed, and the US government publicly admonished ICANN at a public meeting about the revolving door between what should be a regulator to industry. “We need safeguards to ensure that ICANN staff and leadership are not only grounded ethically in their professional actions at ICANN, but also in their actions when they seek career opportunities outside of ICANN,” the head of the US National Telecommunications and Information Administration (NTIA) David Redl said in October 2018.
Cooling off
He proposed that “one potential fix could be ‘cooling off periods’ for ICANN employees that accept employment with companies involved in ICANN activities and programs. This is an ethical way to ensure that conflicts of interest or appearances of unethical behavior are minimized.”
That was not the first time the US government had warned about the potential for conflicts of interest either. It did the same in 2011 when a former ICANN chair walked into an industry job just four days after he left the DNS overseer. The US government said at the time that it was considering adding a conflict-of-interest provision to the contract for domain-name system support performed by ICANN.
But the US government no longer holds that contract, and ICANN acts as an autonomous organization. Despite repeated pressure, ICANN has so far failed to introduce any measures that limit, even for a reasonable period, its board members or executives from the moment they leave the organization.
In fact there are virtually no controls on ICANN executives despite their ability to set the policies that guide a multi-billion-dollar market. As just one example, it appears that both board and staff members are free to hold shares in companies whose value is closely linked to decisions that they make and that they are not required to disclose such holdings. (We have asked ICANN to clarity this point.)
The deal developed by former ICANN CEO Chehade is worth billions of dollars. With that much money at stake, and with a longstanding non-profit registry turned into a for-profit with unlimited ability to raise prices, the internet community has started demanding answers to who knew what and when.
ICANN responds
ICANN for its part claims to have had no knowledge of the deal when it approved the lifting of price caps.
“We were notified about the PIR/ISOC/ETHOS announcement at the time of their public announcement,” ICANN chair Maarten Botterman told The Register in a statement. “There was no consideration of this in the recent changes to the .org registry agreement, as we were not notified of such proposed changes by PIR.”
ICANN is “in the process of analyzing the specifics” of the deal, it told us while noting that it had asked PIR to publish the details though PIR has refused, citing confidentiality.
In a sign that ICANN is unlikely to challenge the sale of the registry – as some have formally urged it to do – the organization says in its statement that the new contract requires the operator of the registry to “provide registrars at least 30 days’ advance written notice of any price increase for initial registrations and 6 months’ notice for any price increases of renewals” while allowing domain owners to renew a domain for as much as 10 years in advance “thus enabling a registrant to lock in current prices for 10 years in advance of a pricing change.”
It is debatable whether even a small number of the 10 million .org domain holders would be aware of price increases until they are required to pay them, or whether the ability to register a domain for 10 years is equivalent to a 10-year price freeze.
Having failed to carry out any economic analyses of the multi-billion-dollar market that is oversees, ICANN continues to make the argument that domain name holders are free to move between registries easily. But those in the market know that the opposite is in fact true.
Printing money
All the data demonstrates that organizations are actually very resistant to moving from an established internet address and with domain names costing very little in real terms – between $10 and $15 a year – there is enormous inherent value in established registries because companies will pay many times the value of their domain in order to keep their current website, online presence, and email systems in place.
That is why the most established registries – .com, .net and .org – have long had price caps placed on them, limiting the amount they can increase renewal fees.
One recent example shows the enormous in-built value within these registries: when the US government said last year that it was planning to lift a price freeze on dot-com domains and allow the operator, Verisign, to increase prices by seven per cent a year, Verisign’s share price jumped 16 per cent as the market calculated the value of that price increase: $1 billion.
The .org registry is in a very similar situation with large organizations long established with .org domains willing to pay dozens or hundreds of times the current renewal cost of their domain.
As to why ISOC made the decision to abandon .org’s non-profit status in agreeing to the sale, the organization did not address our question directly but instead pointed to its benefits.
“We believe many in the community see the long-term benefits of this deal,” it said in a statement, arguing that it will “promote long-term financial security and more diversified funding for years to come to support the Internet Society’s vision that the Internet is for everyone; and PIR will be able to expand its mission to engage in purposeful work to advance important issues and further strengthen its commitment to the .org community.”
Committed but not open
ISOC also implies that it has a series of commitments from Ethos Capital over how it will run the registry, although neither it not Ethos Capital have been willing to share them with us.
“Ethos Capital is committed to ensuring continuity of PIR’s operations and maintaining the strong community relationships PIR has established over the years,” according to a statement from ISOC. “All three parties – the Internet Society, PIR and Ethos Capital – are in full alignment that this transaction will protect and enhance the interests of the Internet and .org communities for the future.”
As for the pricing, and the risk of hugely inflated .org renewal prices in future, all parties are providing vague statements about making “reasonable decisions on pricing” but without any commitments and, notably, refusing to provide any financial details of the deal – details that would enable us to analyze how much money Ethos Capital plans to extract from the 10 million holders of .org domains.
Questions
Despite the lengthy statements provided to us by ICANN and ISOC/PIR there are a few notable questions that they have refused to answer or have overlooked.
We asked ICANN to clarify this point and it pointed us to its conflict of interest policy. The policy makes no mention of holding shares or being required to disclose holdings. Nor does it include any “cooling off” periods as suggested repeatedly by others. The policy requires board members and staff to self-report any conflicts and notably contains no method to sanction or penalize someone found to have failed to disclose a conflict of interest.
We have also asked ICANN:
- If there a case for it to insist on maintaining non-profit status for the .org registry as part of the contract.
- If it intends to investigate what happened, particularly if ISOC was in negotiations and failed to say anything while pushing for price caps to be lifted.
- Whether ICANN should have required an economic analysis of the contract renewal terms before it agreed to them. And whether it will commit to such analyses in future.
- If it will acknowledge that community feeling was so strongly against lifting price caps for good reason. And if this was an occasion where ICANN’s management and board should have listened.
- If the Board recognizes that it should have made the decision to lift price caps rather than just staff and whether it would introduce a process for ensuring proper consideration is given to such matters in future.
We have asked PIR/ISOC:
- For fuller details on how and when the negotiations happened and between who.
- For more information about the deal itself, including how it is structured and how much it is worth.
We have asked Ethos Capital – which has so far failed to respond to questions despite several days of notice:
- How much it paid for the rights to the .org registry.
- How the deal with ISOC/PIR is structured.
- When negotiations started.
- Where and from whom Ethos Capital receives its funding.
- If the company will provide any comment and/or commitments to pricing.
- What the connection is between Ethos and former ICANN CEO Fadi Chehade.
- If it has any plans to change the management of .org and/or the team at PIR.
We will update this story if and when they respond.
from: https://www.theregister.co.uk/2019/11/20/org_registry_sale_shambles/